I've been slow getting through Businessweek this week, so I just saw this today. Maybe the deficit isn't in such bad shape after all.
But that budget forecast is incomplete and perhaps overly pessimistic because it doesn't take adequate account of the growing wealth — and future tax payments — of America's Investor Class. Ordinary Americans and their employers are socking away huge sums in tax-deferred accounts such as Individual Retirement Accounts, 401(k)s, and traditional pensions. The total in such accounts is roughly $11 trillion today, with hundreds of billions in new contributions pouring in every year. Under current law, retirees will pay ordinary income taxes as they withdraw money from these accounts. Surprisingly, official long-term budget estimates ignore most of these projected tax receipts — and the amounts are simply staggering.
In a new, as-yet-unpublished paper, Stanford University economist Michael J. Boskin estimates that the value of these deferred taxes through 2040 is roughly $12 trillion in today's dollars. By comparison, the official estimate of the unfunded Social Security liability is $3.5 trillion in today's dollars, while the unfunded Medicare liability for hospital insurance is $5.9 trillion. Boskin, who served as chief of the Council of Economic Advisers in the first Bush Administration and was a key economic adviser to George W. Bush in his 2000 campaign, concludes that much of the anticipated long-term budget gap may not exist — if current tax laws remain on the books. "Deferred taxes already accrued are large and will likely grow substantially in the future," Boskin told BusinessWeek, "and they are not appropriately accounted for in long-run budget forecasts and academic studies that rely on them."
Analysis of this type is complex, and hinges on many assumptions. Who knows what tax policy will really be like when the baby boomers start tapping their 401Ks? But it does provide some hope.